One of the leading sources of alternative business finance is merchant cash advance. Merchant cash advance providers generally provide funds to small and medium-sized businesses and retailers using a special form of factoring to be later discussed. Merchant loans which are a byproduct of merchant advance transactions differ markedly from commercial banks in that they do not interest; instead, merchants pay a fixed fee for the service. In actuality, the merchant cash advance provider actually purchases a portion of the future receivables of the merchant at a discounted price.  

Unlike a loan, the merchant does not provide any form of guarantee to the merchant cash advance provider that the loan is going to be repaid. This alone has been identified as the most important difference between merchant loans and traditional business loans. In spite of this classic distinction, there have, however, been some cases where a merchant cash advance provider tried to structure the transaction as a traditional loan.

In one typical case, the merchant provider obtained a personal guarantee from the business owner, making the merchant liable for repaying the loan even if the business fails. In the ensuing legal battle, the United States second circuit court of appeal had to provide what has been described as a classic definition of merchant cash advance.  In the ruling, it was emphasized that a merchant cash advance transaction is essentially a sale; a sale being the transfer of property or a thing for the price in money.

It was also emphasized that the transfer of property—in the case of merchant loans, the future credit card sales of the merchant—remains the essence of the transaction. That being the case, a merchant transaction is tied to the future credit sales of the business and nothing more. This means that the question of obtaining personal guarantees from merchants does not arise in the first place. A business loan, on the other hand, was defined as a transaction in which a lender offers a certain amount of money to a business and the business agrees to repay unconditionally over a fixed period of time. For a loan transaction, the business can be sanctioned if it fails to meet up with payments at the agreed interval; it could also be rewarded if it is able to pay back the loan quicker than expected. For merchant loans, there are no penalties for late payments, nor are there rewards for supposedly early payments.

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What Purpose can Merchant Cash Advance serve in a Business

A merchant cash advance can serve different purposes for a business. In contrast to what obtains in commercial bank loans where the banks are particular about what the loan is to be used for, merchant cash advance providers do not pay much attention to what the loans are to be used for, provided that they are satisfied the merchant will be able to repay the loan. Merchant Loans can be used to purchase inventory, purchase new equipment, meet payroll obligations, and even repay previous debts. In essence, a merchant cash advance is very versatile and can be used for anything the business decides.

What are the Requirements for Merchant Cash Advance

In order for a business to be eligible for a merchant cash advance, it has to, first and foremost, accept credit card payments. The business must be also be generating substantial monthly revenue since the repayment of merchant loans is solely based on the revenue. In most cases, the amount a business can borrow is also related to the revenue it can generate. Some providers insist that a business must have monthly revenue of at least 5000 dollars. The amount a business can be issued is also limited to about 2 to 4 times of its monthly revenue. Apart from the issue of revenue, the business must also meet the credit score requirement of the individual providers. As merchant lenders do not pay much attention business owners are also required to meet a minimum score of about 500. It is also required for a merchant to have a physical location before it can receive merchant loans. Online based businesses are generally excluded from merchant cash advance.

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The process of obtaining merchant cash advance

Small businesses that are eligible for merchant cash advance, as a first step, send an application to the merchant vendors, after which negotiations begin. Unlike a commercial bank loan, merchant loans are tailored to meet the needs of the individual business. For example, before the factor and retrieval rates are determined, the nature of the business, its monthly revenue, and other peculiarities are considered. The factor rate is an amount by which the actual cash advance is multiplied to arrive at the total amount which the business is expected to pay. This amount is often less than 1.5. On the other hand, the retrieval rate represents the portion of the daily credit sales of the merchant that is to be credited to the merchant provider. Typical retrieval rates are between 15 and 25 percent. The retrieval rate could also be in the form a fixed amount that is thought to be equivalent to the agreed percentage. For if at the beginning the merchant vendor assumes that a 15 percent retrieval rate meant 500 dollars a day, all things being equal, then it is possible for this to be the fixed amount which the business pays regardless of what later happens. Once an agreement has been reached on factor rate and retrieval rate, the merchant cash advance is signed and cash is issued to the business. The business then continues to make daily payments until the debt has been repaid.

Why businesses might want to opt for merchant loans

Most small business owners would agree that in order to combat business challenges headlong it is important to have access to quick cash such as merchant loans. For one thing, a business can count on merchant cash advance providers when in dire need of cash, since an advance would normally be delivered. Apart from speed, the entire process is also easy as only minimal documentation is required. Above all, business owners do not have to bother about collateral, credit score, and complex legal issues usually associated with bank loans. All in all, businesses that have utilized merchant loans in the past have always acknowledged how it helped their businesses survive after they had been rejected by commercial banks.